Fund Accounting for Dummies

         OR

        Everything You Wanted to Know about Vallejo's Accounting Practices

            Written by Paul Norberg

            with glitter sprinkles from ADQ Katy Miessner

             01/08/2008  

The City is currently projecting that in 2 ½ years-by June 30, 2010-our General Fund will have a deficit of $22.6 million. 

The city has over $1 billion in assets and collects and spends about $300 million annually; this year about $82.8 million in the General Fund, and the remaining $217.2 million in other special funds. You might ask, why can't the city simply move money from one "fund" to another to solve the huge problem we are now facing with the General Fund?  To answer this question, first you need to understand the complexities of "Fund Accounting" and the restrictions it places on governmental spending.

A government is like a non-profit corporation.  The City has no personal profit motive-that is, no shareholders-and instead measures "accountability" instead of profitability.

The main purpose of this "accountability"-the guiding principle of governmental "Fund Accounting"-is to keep revenues and expenses separate from each other to insure the money is legally spent as the taxpayers intended it to be.  In a typical corporation or private business the owners or managers can move money around to create new projects or cover losses from one department with profits from another.  Governments on the other hand must separate-or segregate-money to insure that funds collected for one purpose is spent only on that purpose.  This is exactly what we are now facing.

On to the nuts and bolts:

The City of Vallejo uses Fund Accounting to show to the Public (us taxpayers) and other concerned contributors to City funds (such as grants or enterprise funds for certain activities) that the City maintains adequate assets in order to provide future programs and services.  The City of Vallejo is required to report their finances using "Fund Accounting" because they are required to prove how money is spent, rather than how much profit was earned.

Of all the funds, the General Fund is mainly what is available to cover routine costs of running the city such as police and fire, public works, community services and city administration.  The General Fund receives revenue from sales taxes, property taxes, motor vehicle license fees, property transfer fees, utility user taxes and other "unrestricted" taxes and fees charged by the city.  Unrestricted refers to the fact that those entities paying taxes (like us), etc. into the General Fund are NOT restricting it to pay for particular expenses within the City's budget.  For instance, when you pay your property tax, you do not have the ability to "restrict" your taxes; you can't tell the City that they can only spend your taxes on police services.  But, if you are feeling philanthropic and you have the cash, you could grant $100,000 to the City but require that the City only use it to pay for police services-in other words, you could "restrict" your grant to police services.

The other special funds are used to keep track of other "restricted" activities such as the Water Department, Sanitation and Flood Control District, Discovery Kingdom, golf courses, marina, Local Transportation, Redevelopment Agency, Housing Authority, Mare Island Conversion and other entities. Or, as our example from the last paragraph, the City would set up a special fund for that $100,000 you donated to the City for police services.  FYI, the Vallejo City Unified School District (VCUSD) and the Greater Vallejo Recreation District (GVRD) are separate organizations and are not under the control of the City Manager, Mayor and City Council.

The "Fund Accounting" system keeps all of these funds separate-like your $100,000 for police services.  You can think of the City's separate "funds" as separate checking accounts.  When you imagine special funds, imagine that you and I both gave the City of Vallejo the responsibility to manage our personal checking accounts to pay our bills, and we pay the City a small administration fee to do this: 

Over the year, you deposit $25,000 into your account, and you direct the City to pay your bills using that money.  Your bills for the year add up to $20,000 (including the City's admin fee) and at the end you have $5,000 left. 

Over the year, I deposit $15,000 into my account and I direct the City to pay my bills using this money.  My bills add up to $20,000 (including the City's admin fee) and so at the end, I need $5,000.

Can you imagine how mad you would be if the City used your $5,000 "surplus" to pay off my bills that I did not have enough money to pay? This would actually be illegal, and you would probably sue the City if they did this.  This is exactly why the City can't use special funds to pay off the General Fund.  Recently, Council member Bartee suggested the City transfer Water Fund surpluses to the General Fund, but as Council member Schivley accurately pointed out, this would be illegal, because in 1996, us California voters passed proposition 218 that said-no way: cities can not use any Water Fund surpluses to pay off General Fund deficits.  Other funds have similar restrictions.

(And, BTW, the City does charge the separate special funds an admin fee to make sure that these funds pay their fair share of City costs, like payroll, accounting, human resources and other administration costs.)

A good example of how fund accounting works in Vallejo is the "landscape maintenance district" (LMD) program.  Vallejo doesn't have sufficient General Fund tax revenue to adequately maintain the public landscape in many areas of the city.  To solve this problem, over 20 different LMDs were created by taxpayers in those districts.  Homeowners in each district agreed to tax themselves additionally, and those additional taxes-or funds-are used to maintain the public landscape in their districts.  If one district has a surplus, the funds in that district can't be used to fund a shortage in another district or a shortage in the general fund.  Sort of like me not getting to use your $5,000 surplus to pay my bills.

"Enterprise" funds are like private businesses.  They charge a fee for the service provided. The Water Department, marina, golf courses and the Sanitation and Flood Control District are examples of segregated enterprise funds.  The money collected must legally be used for that purpose and can't be allocated to the general fund to cover shortages. 

The Conclusion

Rob Stout, Vallejo's Finance Director is a Certified Public Accountant (CPA) with extensive experience in governmental fund accounting.  He is responsible for accurately maintaining financial records of all the city funds. Every year the city prepares a Comprehensive Annual Financial Report (CAFR) which includes details on all the various city funds.  The CAFR is then audited by an independent auditing company and the auditor issues an opinion on the accuracy of the data.  The current CAFR and independent auditor's reports are available on the city web site in the finance section. 

The independent auditor's report states that the financial statements "present fairly the financial position of the city." In non-accounting speak, this means that in their review of the City's books, the auditors determined that the City was properly and accurately tracking and spending the City's revenues in their appropriate special funds.  In other words, the City is NOT hiding any money. 

To create the budget, the City starts with how much money they had at June 30, 2006, from the auditor's expert opinion of the financial statements. Then they add in a conservative estimate of revenues based on current experience-liberal estimates are never recommended for budgeting because there is no guarantee that we will actually receive the revenues.  And if we don't receive these revenue estimates, our deficits grow.    The City then subtracts future expenses they know the City can't avoid, like Firefighter salaries that include 10% raises they will likely get year after year. Remember, former Council member Tony Pearsall asked the Firefighters to forego their raises for two years to help us from going into a deficit and unfortunately, the Fire Union refused.